Newbie Question about Calculating Rental Income Tax
Mike BecherPro Member
Rental Property Investor · North Syracuse, NY · Member since 2018 · 30 posts · 32 votesNewbie Question about Calculating Rental Income Tax
Most Popular Reply
Michael PlaksPro Member
Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votesFirst - basic theory. You take your rental income and subtract all expenses: mortgage interest, property taxes, insurance, maintenance etc. Then you also subtract depreciation which is an accounting gimmick to write off the cost of the property. To very roughly estimate depreciation, take 80% of the property cost and divide it by 30 and then divide by 2 because you bought it mid-year. Warning: you subtract mortgage interest, as opposed to total mortgage payments.
Usually, after subtracting depreciation, you will see a negative number, unless the property is free of mortgage. It means that you have no taxable rental income, and your taxes do not increase. They might even go down, depending on your total income.
Second - tools. Buy Turbotax 2018 software which will soon be available. (Do not use earlier versions, because the tax law has changed substantially, and because you might end up using this software for the actual tax return.) Create a tax return without your rental property which should be straightforward. Write down the total tax. Then add your rental property by answering the Turbotax questions the best you can. See if the total tax has changed and by how much.
Third - hiring a CPA. It's a toss-up. On one hand, there're a lot of mistakes that you could make by doing it in Turbotax. Setting up depreciation incorrectly, deducting the wrong amount of property taxes since you only owned the house for part of the year, deducting something that could not be deducted or not deducting something that could be etc.
A tax accountant would prevent all these errors, but for a price. The cost might outweigh the benefits.
It's really up to you to decide whether you want to:
- do it yourself and hope it's good enough
- become knowledgeable in real estate taxation thru classes or books
- hire an accountant to do it for you
- hire an accountant to review what you have done yourself
Once you start growing your real estate portfolio, then a good CPA can become indispensable with proactive tax planning.
9 Replies
- Plano, TX · Member since 2015 · 2 posts · 2 votes7y
Congratulations on the property Mike! In the past H&R block's online tax calculator has served me well, although it really isn't that thorough. That being said, a good relationship with a good CPA is invaluable. It may be worth sitting down with one now and starting that relationship.
- 7yBasit SiddiqiBusiness MemberAccountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
@Mike Becher
It may be difficult to find the calculator that you are looking for.
This is because everyone's tax profile is different(some may be in a 0%, 10%, 12%, 22%, etc tax bracket.
there are over 50 states and some states have different rules on addbacks of bonus depreciation/section 179 expense.
Furthermore, some people's deductibility depends on whether they participate in the activity or don't.I can go on and on...but there is a lot of variables.
With that said - you can get a good idea by taking your cashflow(adding back principal payments that were deducted) less depreciation and multiplying it by your marginal tax rate.
If your total income is above $100,000. some of the losses may be limited.
Basit Siddiqi CPA4.979 Reviews Since it's your first time keeping track of the numbers, you should really get a CPA just for the beginning of your RE journey. Learn the ropes a bit then you can most likely manage it all on your own. If you're in NY, there's many CPAs I can recommend if you'd like or just do some research and find one that has RE experience that can be a great mentor to you as well.
- Rental Property Investor · North Syracuse, NY · Member since 2018 · 30 posts · 32 votes7y@Ahad Ali Just out of curiosity, what should I expect a CPA to cost me to get things started?
Well for starters there are a few options for you.
You can at first maybe do a consultation with a CPA to get ideas and set your self up right.
Then you can decide how involved you want the CPA to be, quarterly ? Annually? So the fee fill vary depends on what needs to be done. It doesn’t hurt to ask around and talk to few people on the BP. There’s a lot of us that work with clients remotely .
Originally posted by @Mike Becher:
@Ahad Ali Just out of curiosity, what should I expect a CPA to cost me to get things started?- 7yMichael PlaksPro MemberTax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
First - basic theory. You take your rental income and subtract all expenses: mortgage interest, property taxes, insurance, maintenance etc. Then you also subtract depreciation which is an accounting gimmick to write off the cost of the property. To very roughly estimate depreciation, take 80% of the property cost and divide it by 30 and then divide by 2 because you bought it mid-year. Warning: you subtract mortgage interest, as opposed to total mortgage payments.
Usually, after subtracting depreciation, you will see a negative number, unless the property is free of mortgage. It means that you have no taxable rental income, and your taxes do not increase. They might even go down, depending on your total income.
Second - tools. Buy Turbotax 2018 software which will soon be available. (Do not use earlier versions, because the tax law has changed substantially, and because you might end up using this software for the actual tax return.) Create a tax return without your rental property which should be straightforward. Write down the total tax. Then add your rental property by answering the Turbotax questions the best you can. See if the total tax has changed and by how much.
Third - hiring a CPA. It's a toss-up. On one hand, there're a lot of mistakes that you could make by doing it in Turbotax. Setting up depreciation incorrectly, deducting the wrong amount of property taxes since you only owned the house for part of the year, deducting something that could not be deducted or not deducting something that could be etc.
A tax accountant would prevent all these errors, but for a price. The cost might outweigh the benefits.
It's really up to you to decide whether you want to:
- do it yourself and hope it's good enough
- become knowledgeable in real estate taxation thru classes or books
- hire an accountant to do it for you
- hire an accountant to review what you have done yourself
Once you start growing your real estate portfolio, then a good CPA can become indispensable with proactive tax planning.
- Rental Property Investor · North Syracuse, NY · Member since 2018 · 30 posts · 32 votes7y
@Michael Plaks Super helpful and detailed. Appreciate the time you spent to write all that out. Just for clarification, when you take 80% of the property cost, is that the appraised value or what I actually payed for the property?
- 7yMichael PlaksPro MemberTax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
What I was afraid would happen did happen. :) You decided that, with a few more paragraphs, you will arrive to understanding how it works. Unfortunately, there's a lot more details that come into play. Each answer will lead to more questions, which is normal.
I'm just pointing out that it's unrealistic to expect to learn this topic from an online post or two. When I teach a class on taxation for landlords, it takes 4 hours, and it still only covers the basics.
- 80% of what you paid, or rather what the property cost, including some closing costs. And my 80% was arbitrary. You should allocate part of the purchase cost to land, and I just randomly took 20% to land. In reality, this allocation needs to be based on something, like the county appraisal.
- Once I mentioned "some closing costs", you will want to ask which ones. That's a very long question to answer though. The short version is: everything except the items immediately deductible (local taxes, interest, insurance and maybe couple other items) and the items specifically related to the mortgage (appraisal, origination, points, etc.). This area is one of those where you have to choose between the 4 options I mentioned in my earlier reply.
- Down payment is not an expense and is not part of any tax calculation
- Assuming that your numbers are correct, you're having a positive taxable income even after depreciation. Between the IRS and NY taxes, your tax on that extra $4k income could be anywhere between $0 and $2,000, depending on your total income.
- You could suppress this number by increasing depreciation and maybe finding other deductible items, but that would not be a DIY project. At least not without deeper learning.
- Rental Property Investor · North Syracuse, NY · Member since 2018 · 30 posts · 32 votes7y
Originally posted by @Michael Plaks:
What I was afraid would happen did happen. :) You decided that, with a few more paragraphs, you will arrive to understanding how it works. Unfortunately, there's a lot more details that come into play. Each answer will lead to more questions, which is normal.
I'm just pointing out that it's unrealistic to expect to learn this topic from an online post or two. When I teach a class on taxation for landlords, it takes 4 hours, and it still only covers the basics.
I sincerely appreciate the honesty. I like to know how things work. I'm a DIY kind of person even though that means I'm likely going to fumble through it initially. As you and others have pointed out there are clearly aspects to this that aren't easily transferrable and details I'll miss, and assumptions I'll make, due to incompetence.
I think meeting with a CPA is my best route. I usually learn pretty quickly when I get to watch someone work the numbers and can ask a bunch of questions throughout the process.
Thanks again for the detailed response.
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